Deputy Commissioner v Defendants

Supreme Court of Victoria|2013-08-07|Before: ELLIOTT J

INCOME TAX - existing judgment debt - declaratory relief - declaration sought that taxpayer beneficially entitled to real property - standing - meaning of "a proceeding to recover an amount of a tax-related liability" - Taxation Administration Act 1953 (Cth), s 255-50(1)

1 The defendants apply to the court to have the entirety of the amended statement of claim struck out. They submit the plaintiff, the Deputy Commissioner of Taxation ("the Deputy Commissioner") has no standing to bring the claims made in the amended statement of claim. Alternatively, the defendants seek to have the preamble to the amended statement of claim struck out. That preamble reads: "The Deputy Commissioner pleads his cause of action, and avers and states pursuant to s 255-50 of Schedule 1 of the (Cth) as follows." I will deal with each of these in turn.

**2 There was no issue between the parties that the first defendant, Tom Karas ("Karas") is indebted to the Deputy Commissioner in the sum of $47,147,983. Judgment in this sum was obtained on 1 December 2011 ("the Earlier Proceeding").

3 By this proceeding, the Deputy Commissioner seeks to establish that Karas has an interest in 2 properties held by the second defendant, Capital One Securities Pty Ltd. Declarations are sought in this regard. No monetary claim is made. The Deputy Commissioner has filed an affidavit to demonstrate that the purpose of obtaining declarations is to seek to enforce the Earlier Judgment against the 2 properties.

4 As noted above, the defendants seek to strike out the amended statement of claim filed 30 May 2013 in its entirety on the basis the Deputy Commissioner does not have standing to prosecute the proceeding.

5 The defendants submit that, as an unsecured creditor, the Deputy Commissioner cannot claim he has any interest in the 2 properties "by way of charge or other security, or by way of any equitable interest." It is submitted that because the Deputy Commissioner's relationship with Karas is merely that of an unsecured creditor, the floodgates would be opened if the court were to entertain a claim such as the one being made in this proceeding. In short, the defendants submit the Deputy Commissioner is required to establish something more than merely being an unsecured creditor in order to have standing to make the claims now made.

6 In opposition to the defendants' submissions, the Deputy Commissioner relies on the decision of the Court of Appeal in Sarkis v Deputy Commissioner of Taxation ("Sarkis").[1]

7 In response, the defendants submit that case is distinguishable from the case before me. In so doing, they submitted that in Sarkis, the question of standing only arose for consideration at trial after the plaintiff had completed its evidence and arose as part of a no-case submission. The no-case submission required the court to consider at the same time the substantive issue of whether the evidence established the beneficial interest in question. In that context, to deny the plaintiff's standing would have led to the dismissal of the claim and entry of judgment for the defendants.

8 It was submitted on behalf of the defendants this would almost certainly have created an issue estoppel or even res judicata, which may have precluded any future trustee in bankruptcy of the judgment debtors from reviving the claim as to the beneficial interest in the property.

9 The defendants submitted this case is fundamentally different; the question of standing being raised at the stage of the pleadings. On this basis, it was contended that this court is not bound by the decision in Sarkis to hold that the Deputy Commissioner has standing. A further distinguishing feature was said to be that, in this case, the Deputy Commissioner has a freezing order in its favour which prevents the subject assets from being dealt with by both the defendants. This was submitted to mean that, if the court were to strike out the Deputy Commissioner's claim for a declaration of trust in this case, this would not create any impediment by way of issue estoppel to a future claim by a trustee in bankruptcy or a receiver.

10 It was also submitted that because the Deputy Commissioner has in contemplation the possibility of proceeding to appoint a receiver or to take bankruptcy proceedings, this provides a good reason for distinguishing the present case from Sarkis.

11 Finally, it was submitted that if the approach that was taken in Sarkis has applied to every stage of a proceeding, this could create anomalous situations. By way of example, it was submitted that if there were several creditors, adherence to the decision of Sarkis would mean that any one of them could unilaterally commence a proceeding of this kind. If the proceeding were unsuccessful, the other creditors would all be bound regardless of their attitude as to how well the proceeding had been conducted by the creditor.

12 In summary, it was submitted by the defendants that, as a general rule, it is preferable that claims to determine rights and obligations as between a debtor and third party should be left to a neutral party who is responsible to protect the interests of all creditors, such as a receiver or trustee in bankruptcy.

13 In my view this case is on all fours with Sarkis. In that case the Deputy Commissioner sought declarations that 2 of the defendants, who were judgment debtors, were beneficially entitled to land registered in the names of 2 other defendants. Nettle JA, with whom Warren CJ and Charles JA agreed, referred[2] to the cases of Forster v Jododex Aust. Pty Ltd,[3] Russian Commercial and Industrial Bank v British Bank for Foreign Trade Ltd[4] and Ainsworth v Criminal Justice Commission.[5]

14 His Honour set out a passage from the last of those cases which reads as follows:[6]

It is now accepted that superior courts have inherent power to grant declaratory relief. It is a discretionary power which "[i]t is neither possible nor desirable to fetter...by laying down rules as to the manner of its exercise." However, it is confined by the considerations which mark out the boundaries of judicial power. Hence, declaratory relief must be directed to the determination of legal controversies and not to answering abstract or hypothetical questions. The person seeking relief must have "a real interest" and relief will not be granted if the question "is purely hypothetical", if relief is "claimed in relation to circumstances that [have] not occurred and might never happen" or if "the Court's declaration will produce no foreseeable consequences for the parties".**

15 Having set out this passage, his Honour continued:[7]

In this case the Deputy Commissioner has a real interest in establishing that [the taxpayers] were beneficially entitled to the property. She wished to ensure that in the event of execution proceedings, the taxpayers could not contend that the property was immune from execution. It is not to the point that the question might just as well have been determined in subsequent proceedings or even that that is the way in which it would usually be done. A plaintiff is not necessarily to be refused declaratory relief just because another form of relief is available, and here a declaration was a more satisfactory remedy because it enabled the Deputy Commissioner to ascertain in advance of execution proceedings whether the property would be available for execution. Practically speaking, it would have been a waste of time and resources to insist that execution proceedings be instituted in order to determine whether the property was available for execution.

(Emphasis added.)

**16 In my view, the points raised in this passage meet each of the defendant's submissions. The case is indistinguishable from the one before me. The timing of when an issue as to standing is raised can make no difference; either the Deputy Commissioner has standing or he does not.

17 In relation to the floodgates submission, I do not think this is a relevant consideration. Clearly, I am bound to rule in accordance with the judgment of the Court of Appeal in Sarkis. In any event, Sarkis was decided 8 years ago, and there is nothing before the court to suggest it has lead to a flood of unsecured creditors seeking to interfere with the property rights of third parties.

18 Finally, the authorities make it clear that the court's power to grant declaratory relief is a discretionary power which is not to be fettered. It may be open to a defendant to put matters such as those raised by the defendants to the court in inviting the court not to exercise the discretion in a plaintiff's favour. However, such matters do not go to the question of whether the Deputy Commissioner has standing.

19 Accordingly, insofar as the defendants seek to strike out the amended statement of claim for want of standing, the application shall be dismissed.**

20 I turn to the second issue. Section 255-50(1) of Schedule 1 of the Taxation Administration Act 1953 (Cth) ("the Act") provides:

In a proceeding to recover an amount of a tax-related liability, a statement or averment about a matter in the Deputy Commissioner's complaint, claim or declaration is prima facie evidence of the matter.

"Tax-related liability" is defined in s 255-1 [8] of the Act to mean:

a pecuniary liability to the Commonwealth arising directly under a taxation law (including a liability the amount of which is not yet due and payable).

**21 The Deputy Commissioner submits this proceeding is "a proceeding to recover an amount of a tax-related liability". I was informed there is no authority on the meaning of this phrase. The Deputy Commissioner submitted the court should construe the words broadly. He notes similar phrases are used in other pieces of legislation, but submits the statutory context is markedly different and therefore cases on those other phrases are of no assistance.

22 The Deputy Commissioner submits the court should be assisted in construing the provision by what was said in the explanatory memorandum to the "A New Tax System (Tax Administration) Bill 1999" at paragraphs 2.43 and 2.44 which read as follows:**

2.43 The existing recovery provisions allow the use of averments in originating proceedings in some cases (e.g. for the recovery of amounts under the RPS, PAYE and PPS systems), but not others (e.g. for the recovery of assessed tax liabilities). New section 255-50 will allow the use of averments in recovery proceedings for all tax-related liabilities. This will complement the standardised rule in new section 255-45 which allows the use of evidentiary certificates in proceedings for the recovery of all tax-related liabilities.

2.44 The new standardised provisions will continue to provide administratively convenient methods of presenting evidence to a court. As the evidence presented using an averment under new section 255-50 is prima facie, it will not restrict a taxpayer in presenting evidence as a defence.

**23 In my view, this extract from the explanatory memorandum takes the matter no further. It speaks in terms of "averments in recovery proceedings for all tax-related liabilities." In substance, that says no more than what is contained in the subsection itself. The extract also refers to s 255-45, but senior counsel for the Deputy Commissioner submitted the existence of that section and the language used (including the same phrase in question) did not add anything to the proper construction of s 255-50. He stated the court was still left with the same question: does one have a proceeding of the character referred to in s 255-50(1)? With respect, I agree with this submission.

24 I am therefore required to give the phrase its natural and ordinary meaning in the context of the Act as a whole.[9] No other provision of the Act was referred to by counsel which might be said to effect the natural and ordinary meaning of the phrase.

25 Before turning to the exercise of construction, I refer to a further submission of the Deputy Commissioner. The Deputy Commissioner submits that if the declaratory relief now sought had been sought in the Earlier Proceeding, then s 255-50(1) would apply to all of the claims in that proceeding.

26 He submits that it should make no difference whether the relief now sought is sought separately, or together with the proceedings seeking to recover the debt owing. He also submitted it would make no difference that there would be a second defendant who does not have, and has not had, "a tax-related liability" for the purposes of the section.

27 In the 5th edition of the Macquarie Dictionary, "recover" is relevantly defined as follows:[10]**

Law. a. to obtain judgment in a court of law, or by legal proceedings: to recover damages for a wrong. b. to acquire title to through judicial process: to recover land.

28 Senior counsel for the Deputy Commissioner properly conceded that this proceeding relates to recovery of an amount of a tax-related liability, rather than being a proceeding to recover such an amount. He also accepted that the proceeding was but a step in relation to the ability to recover. However, he submitted that the language of s 255-50(1) should be construed broadly to include such concepts.

29 In my view there is no legitimate basis upon which this proceeding can be characterised as a proceeding to recover an amount.

30 If the Deputy Commissioner succeeds in obtaining the declarations sought, and does nothing further, he would recover nothing. To actually recover any part of the judgment debt, the Deputy Commissioner needs to take steps which are entirely outside this proceeding. Moreover, there is no need to bring this proceeding to take those steps; that is, this proceeding is not a necessary step to recovery. It is a step the Deputy Commissioner has chosen to take, to use the words of Nettle JA in Sarkis,[11] "to ensure that in the event of execution proceedings [the taxpayer] could not contend that the property was immune from execution".

31 The conclusion I have reached is not just a question of form, it is a matter of substance. Accordingly, it is not necessary for me to consider the submission about whether s 255-50(1) would operate if declarations had been sought in the Earlier Proceeding.

32 It is also unnecessary to consider comments of Nettle JA in Sarkis,[12] which read as follows:**

So far as inferences are concerned, it is not in doubt that the burden of proof was on the Deputy Commissioner and that the appellants were not obliged to adduce evidence. They were entitled to put the Deputy Commissioner to proof and to submit that she had failed to make out her case.

33 His Honour made no reference to s 255-50(1) in his judgment. Although the subsection was in existence at the time,[13] it is not clear whether this statement was made with the provision in mind. However, as I have stated, I need not say anything further on the matter.

34 For the reasons set out above, the preamble to the amended statement of claim will be struck out. However, the application of the defendants will otherwise be dismissed.

[8] "Tax-related liability" is also defined in s 995-1 of the Income Tax Assessment Act 1997 (Cth). The definitions are identical.

[9] See, for example, CIC Insurance Ltd v Bankstown Football Club Ltd (1997) 187 CLR 384, 408.3 (Brennan CJ, Dawson, Toohey and Gummow JJ); Winslow Constructors Pty Ltd v Mt Holden Estates Pty Ltd [2004] VSCA 159; (2004) 10 VR 435, 449 [46]-[47], 458 [94] (Hansen AJA, Callaway and Buchanan JJA agreeing).

[13] It came into operation on the date of assent, 22 December 1999: A New Tax System (Tax Administration) Act 1999 (Cth), s 2(1).

Administration Act 1953

Tax Assessment Act 1997

New Tax System (Tax Administration) Act 1999

At a glance

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Judgment (51 paragraphs)

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Legislation Cited (3)

Cases Cited (4)